Jason Haver: Is the Current Equities Rally the End of the Road -- or the Start of a New Move?

Equities have reached an inflection point; here's a look at the dividing lines.

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It's funny how, even when the market does what we think it will, it always does its best to convince us that it's going to do more. The rally has modestly exceeded my expectations, but (of course) now it wants us to believe that it's headed "to infinity and beyond." And maybe it is; one can never say for sure. But, so far, the market has done a pretty darn good job of following the road map I outlined a week ago (Friday, May 16), when I wrote:

I suspect [the recent sharp decline] may have been an extended fifth wave. Calling extended fifths is difficult, though, because the technical indicators literally don't work -- so it's all about "feel." These are the types of calls I run with as a trader, but shy away from as an analyst, so do with this what you will. If this was an extended fifth, then expect a retrace rally toward 1879-82 (the chart says 80-82), followed by a retest of the 1863-70 zone, followed by another rally leg up toward 1888.

In the wake of that update, the S&P 500 (INDEXSP:.INX) rallied to 1886, then reversed and retested the 1863-70 zone, then indeed reversed again into another rally leg (which has since exceeded the original 1888 target). So, in essence, there have been no real surprises yet, and last Friday's road map captured roughly 40 S&P points of profit.

The question now, of course, is whether this rally end of a correction or the beginning of a new bull leg. From a purely Elliott Wave perspective, unless and until bulls sustain trade above 1903, there is no compelling reason to treat this rally as anything other than a correction, and the preferred count remains unchanged.

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When we study the above chart, it immediately calls to mind two questions:

1. What is the mysterious black alternate ("alt.") count?
2. Why do we have "hot water heaters" when hot water doesn't need to be heated? (This second question isn't covered on the chart specifically, but it's implied.)

The answer to both questions is the same: As of this exact moment, there are no clear answers to either question -- at least not on the S&P chart.

So let's take a look at another index and see if there's more information to be gleaned elsewhere. Below is a chart of the NYSE Composite (INDEXNYSEGIS:NYA), which is an effective representation of the entire New York Stock Exchange. On the NYA chart, we can see the bullish wave potential a bit more clearly (still no help on the hot water heater thing, though):

Click to enlarge

The reason I haven't committed to this bullish count as the alternate on SPX is because we've been stuck in a trading range for longer than it takes a tadpole to turn into a frog (I'm guessing here; I have no idea what the life cycle of a tadpole is), and trading ranges can be very deceptive. Thus, quite simply, if SPX sustains trade north of 1903, then we know what the wave isn't, but I'd like to see the form of any breakout before deciding what the wave actually is. For now, it's enough to be aware that there is indeed significant bullish potential energy in the chart -- but until the conditions are met, it's something of a moot point.

Before going further, at the request of a reader, I'd like to briefly discuss a comment I made in passing in Monday's update, when I wrote:

Ironically, bulls probably have better odds if the market declines directly toward 1850 than they do if 1862 holds and it continues to rally. (I'll discuss that in more detail in Wednesday's update if it becomes appropriate to do so.)

Yet I didn't discuss that on Wednesday because Tuesday was a very mixed session, and although SPX did not make new lows, several other major indices did. And that left Monday's original thesis inconclusive; so there was nothing to discuss on Wednesday (well, more specifically, there would have been too much to discuss on Wednesday, and it likely would have only confused many people). Instead, for Wednesday's update, I was content to simply unravel the near-term waves and project that SPX was headed to 1888-92. Ultimately, the preferred intermediate count was and is unchanged, so we'll wrap things up with the 15-minute SPX chart:

Click to enlarge

In conclusion, while the rally has slightly exceeded Wednesday's target of 1888-92, the preferred count is unchanged, and will remain so unless and until there's a bullish breakout. Trade safe, and have a great weekend!

Follow me on Twitter while I try to figure out exactly how to make practical use of it: @PretzelLogic.

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